The Impact E-Commerce Has on Small and Medium Enterprises - Research Paper Example

Investigate the Impact E-Commerce has on SMEs (Small and Medium Enterprises) and Explore the Perceived Benefits Gained by Operating Online. Table of Contents Literature Review 3 History and Growth of E-Commerce 3 What are SMEs? 4 Contribution of SMEs behind Economic Growth 5 Online Commerce and SMEs 6 Theoretical Models supporting Online Commerce for SMEs 7 Driving Forces behind the Success of E-Commerce 9 Barriers of SMEs towards the Adoption of Online Commerce 11 References 14 Bibliography 17 Literature Review Electronic commerce can easily be considered as one of the most revolutionary of all technological changes that ever swept over human civilization. Broadly speaking, the concept of e-commerce is synonymous with that of online trade where transactions are conducted via the digital media. Hence, it provides a virtual medium where two parties can interact with one another and make financial commitments without necessitating any physical communication (Schniederjans & Cao, 2002). Financial commitments imply any business transaction characterised by an electronic exchange of goods and services or transmission of electronic orders. There are four major categories of e-commerce, namely, Business-to-Business (B2B), Business-to-Consumer (B2C), Peer-to-Peer (P2P) and Consumer-to-Business (C2B) (Rayport & Jaworski, 2003). In addition, there is also government involved in some instances, so that there are actually three parties in such cases. This makes the total number of categories equal to nine; however, it is often omitted due to rarity of such situations ever arising (Schniederjans & Cao, 2002). Quite clearly, electronic commerce enables a two-way communication between various ports involved in a financial transaction. History and Growth of E-Commerce The history of online business can be traced back to that of the invention of World Wide Web, although, it was the least important of all causes that operated behind the invention of the latter (Chan, Lee, Dillon & Chang, 2009). In fact, it was only when researchers were contemplating different areas where the new invention could prove to be beneficial, that the concept of introducing electronic commerce was paved (O’Regan, 2008). The Internet is a common platform for a large quantity of information. Not only has it helped to make communication faster and cheaper, but has also facilitated in building up of a large database including different hardware and software sourced in different networks. This was one of the primary features of Internet that attracted firms from all over the world to try their hand in e-commerce (Schniederjans & Cao, 2002). However, as its use became more and more popular among the firms and their customers, more benefits of using the technology started peeping out. Two of the key advantages of adopting electronic commerce in making financial transactions are – reduction in the cost of accomplishing transactions and enhancing productivity of the firms. Introduction to online technology has helped in lower recruitments and lower cost of maintenance indicating a reduced cost of production. It also has augmented the efficiency levels of the managers that have added to their productivity levels too (Gopalan, 2002). But, apart from the tangible benefits being mentioned above, firms have also realised intangible or virtual benefits arising from the same. Such an intangible benefit that the technology assures is that of an increased customer satisfaction. But, as the managers count the measurable benefits before adopting any changes in underlying technology, it often goes unaccounted for. Even if the managers decide to include it, they are defined according to the outlooks of the former (Schneider, 2008). What are SMEs? Despite the implied advantages, the larger firms were the first to take the plunge. It was only after they had succeeded in their attempt that the concept gained popularity among the small and medium enterprises, which thereby benefited from the same (Kraemer, Dedrick, Melville & Zhu, 2006). Small and medium enterprises are defined or rather distinguished from the larger ones in terms of their size that again is measured through their inherent employee strength (Murphy, 2002). Some observers note that SMEs cannot be defined on the basis of just their inherent employee strength. In fact, they represent the class of firms which could be distinctly identified from the larger ones through significant differences in their total turnover, volume of base capital employed, sales volume, productivity quotients, number of industries where it functions, degree of government assistance, etc. (Bras, 2006). However, delineating on the basis of such a huge number of factors makes the classification complicated and thus, it is actually the size of the firm that acts as the prime element. Precisely, it is assumed that any firm endowed with employee strength lower than 100, can be categorized as an SME. However, this size might vary from one country to another depending on a large number of exogenous factors (Hall, 2002). Contribution of SMEs behind Economic Growth Contribution of SMEs behind economic development can be supported from the fact that almost all developed nations are propped up significantly by their indigenous small and medium scale enterprise. Almost all nations in East Asia are found to be highly benefited from their domestic small and medium sized enterprises. In fact, the essence of their enthralling success story within such a short span of time lies in their preferences for SMEs. They not only helped in creating new employment opportunities but also led to greater value additions and higher sales revenues. The propelling factor is that SMEs need not spend a lot for their maintenance like the larger enterprises have to and neither do they have to provide perks to their employees as expected from the latter. Hence, they can retain a higher proportion of their income for future investments (Hall, 2002). In UK, SMEs consist of 99.8 percent of the entire industrial sector (Bras, 2006) and contribute nearly 50 percent of the national GDP. The concept of SMEs entered the economic sphere of UK during the 1980s and gained an instant popularity among the mass. There was a sudden surge in the stock indices of the nation and suddenly, newer avenues for investment started popping up. The total number of SMEs existing in the economy grew from 57 percent to 67 percent in 1990s since the end of 1980s. Not only have they generated new employment opportunities – accounting for more than 30 percent of total employment, but also increased the competitive edge of the firms through injecting technological changes (Analoui & Karami, 2003). Technological advances, in fact, had been of a great help in smoothening the future of SMEs in the economy as well as in many others gaining from the change. In 2004, 68 percent of total small and medium sized firms in the UK had been found to be taking the advantage of the Internet, which grew to 85 percent by the end of the first quarter of 2005 (Oni & Papazafeiropoulou, 2008). Online Commerce and SMEs Small and medium sized enterprises belong to the most benefited of all industrial groups from the advent of information technology. This is because a digitized environment helps to restrict the high costs of production, which otherwise, are imperious for the growth of SMEs (Kirwan & Conboy, 2006). Moreover, electronic commerce has helped in abolishing the layers present traditionally between the management and the final consumers. Possibilities to interact in a better environment free from external disturbances have helped the officials in getting feedback from their customers and thus improving themselves accordingly. Online commerce is aimed at facilitating transactions, making them less complicated and assisting in a greater efficiency (Gopalan, 2002). Theoretical Models supporting Online Commerce for SMEs Certain technological models support the implementation of online commerce techniques or rather helps to reveal the line through which the importance of e-commerce could be recognised. Technological changes might be radical or incremental, depending upon their significance on productivity. A radical change is one that makes a considerable difference between the traditional and modern system, and requiring additional resources for proper implementation. Adoption of online commerce system is similar to a radical transformation, since it has helped to convert the traditional system into an absolutely new concept of a virtual organisation. It has levelled the medium of communication between buyers and sellers and hence has contributed towards organisational development (Al-Qirim, 2004). Figure 1: A Framework for Electronic Commerce Research in Small to Medium-Sized Enterprises (Source: Al-Qirim, 2004) The figure above (Figure 1) represents the diagrammatic expression of a framework for electronic commerce research in small to medium-sized enterprises, wherein it has been shown that e-commerce coupled with the SMEs give rise to brick-and-click companies that are different from pure-brick (brick-and-mortar) organisations in that they have a physical as well as virtual existence. These organisations represent an intermediary group of firms that are neither pure-brick nor pure-click. The main advantage of these firms are that they are not as capital-extensive as traditional brick-and-mortar organisations as they can channelize some of their funds on e-commerce activities and in turn do away with the hassles as well as costs pertaining to showrooms, office space, etc. Moreover, as compared to their pure-click counterparts, they do not suffer from the lack of credibility due to their partial physical evidence. Eminent researcher and theorist Dave Chaffey (Chaffey & Smith, 2008) points out more clearly the contribution of e-commerce towards organisational growth, by pointing out towards value addition aspect. According to him, injecting online trade in business has two-sided advantages. Firstly, it helps in building up a strong buy-side relation between the supplier and the producer (B2B) through maintaining an electronic account of all transactions. Secondly, it also lays a similar emphasis on the inside operations, through building a B2E (Business – to – Employee) intranet. Hence, according to the observers, online commerce has brought an order and discipline to the entire industrial business system. Figure 2: Maintenance of Demand-Supply Relationship through E-Commerce (Source: Chaffey & Smith, P. R., 2008) SMEs are considered as one of the most significant contributors towards organisational growth and development. Despite of their importance in their respective economies, they are often found to be vulnerable to fluctuations in business environment and hence must deduce all possibilities of a technological change prior to adopting it in their operations. There are four phases that any change must successfully accomplish before considered as a successful one, namely – initiation, adoption, implementation and assimilation (Molla & Duncombe, 2008). On the other hand, the Motivation Ability Theory discloses that a consolidation of organisational resources and employee motivation plays a miraculous role behind the success of a new technology (Merton, 1957). Driving Forces behind the Success of E-Commerce The primary driving force behind the proliferation of e-commerce as a popular business platform is the evolution and fast-paced development of Web-enabled technologies. The nature of transactions that take place through e-commerce calls for user friendly interfaces as well as enhanced security. It is observed that “the development of secure protocols and other factors that permit the secure transfer of electronic funds” (Dale & Lewis, 2006), have contributed immensely towards the growth of e-commerce. This virtual platform is characterised by an unique characteristic in the form of shopping carts that take a note of consumer buying behaviour and provides customers with suggestions. Many customers find this aspect to be interesting and in turn augment the popularity of online commerce. Other noteworthy factors that act as driving forces in making e-commerce a successful business model are global customers, global products, global operations, global resources, global collaborations (Goel, 2007). E-commerce enables customers who may either be individuals, who travel across the globe, or organisations having global operations, to avail faster as well as more convenient services on the go. Modern business requirements necessitate organisations to maintain uniformity of product-portfolio throughout the global markets and also assembling them by transnational subsidiaries. E-commerce facilitates these activities through enhanced marketing as well as quality-control measures. It can also support geographic flexibilities to promote global operations and productions that are generally required to be modified across different economies. Finally, it enhances the efficiency of global collaborations through optimal utilisation of shared resources. Another significant driving factor that influences the popularity of e-commerce is the broad spectrum of incentives that SMEs receive by engaging in it. Organisations are found to be benefitted in terms of product selections, economical pricing, fast and easy navigation, personal attention, reliability and security. It goes beyond saying that such factors make e-commerce a favourable business tool for SMEs across the globe. Figure 3: IS Success Model, Garrity & Sanders (1998) (Source: Khosrow-Pour, 2008) From the figure appended above, additional driving forces may be identified. Speaking categorically, the main factors can be grouped into ‘system use’ and ‘user satisfaction’, which are interlinked. User satisfaction comprises satisfaction pertaining to task support, decision support, QWL (Quality of Work Life), and interface. Higher levels of user satisfaction have a positive impact of individual employees as well the organisation taken as a whole. As e-commerce initiatives require technological integration, it goes beyond saying that organisations should adopt holistic measures in order to align all business processes with this platform. Once integration is manifested, the process has to be implemented successfully. If these requisites are satisfied optimally, they will again prove to be internal driving forces for e-commerce. Figure 4: Goal Satisfaction Based IS Success Model (Source: Khosrow-Pour, 2008) It can be further observed that the Perceived Organisational Impact (POI) depends directly on the satisfaction levels experienced through task support and QWL (Figure 4), and hence, it may be identified that efficient Human Resource Strategies also play an indispensable role in augmenting e-commerce as an effective business tool. Barriers of SMEs towards the Adoption of Online Commerce However, despite all the ways through which introduction of information technology has laid on society, there are certain impediments that prevent the SMEs from adopting them whole-heartedly. The first and foremost hindrance which could be thought of is that related to the security of making transactions. The SMEs have a lower capital base than their larger counterparts and thus, have much less to spare. Irrespectively, they have to operate in an environment similar to that of the latter which quite evidently, leaves them at the mercy of a greater risk (Intrapairot & Srivihok, 2003). Another serious drawback suffered by the SMEs around the world, is a lack of suitable expertise and ample resources to handle sophisticated computer technology. The small and medium sized enterprises lack the factor efficiency necessary to make proper use of the new technology and neither are they endowed with ample funds to train their employees (MacGregor & Vrazalic, 2007). In fact, the employees and employers apparently seem to be happy enough with their yield and fail to realise their importance to the economy. Other barrier-factors that hinder the adoption of e-commerce by SMEs are strategic direction, product type, employee-awareness, lack of top managements’ involvement, technological as well as financial constraints, lofty Internet access charges, poor support in terms of infrastructure and service (Khosrow-Pour, 2008). SMEs are mostly less capital-intensive organisations and hence these barriers prove to be too costly for them to overcome. This is perhaps one of the most vital reasons behind the fact that SMEs are yet to embrace e-commerce on a global basis. The fund constraint proves to be a looming concern for SMEs, owing to which they often cannot afford substantial technical training to their employees. Moreover, the top managements, who are generally the decision making bodies, usually multitask in the context of SMEs and are thus unable to channelize sufficient efforts to institutionalise e-commerce within the organisations. Taken together, these two factors impede the implementation of this state-of-the-art platform. Perhaps a major reason behind such reluctance is that medium and especially small sized organisations feel comfortable with traditional business models and do not want to venture into the riskier Web of virtual business space. Increasing rates of cyber crime also act as a potential barrier as consumers are repelled by the fallouts of online transactions. Monetary transactions that take place over the electronic platform require strong security measures that often remain unaffordable by SMEs and this factor dampens the customers’ motivation and keeps them away from availing the benefits of e-commerce. Lastly, credibility remains one of the most vital barriers to e-commerce. Customers generally tend to feel that the products that are displayed on the Web-catalogues may be different from the actual product and they are also worried about the quality of such products. Since pure-click SMEs rely mainly upon Web-catalogues, they cannot setup alternative showrooms to support their commitment to quality. Once consumers identify a SME as a pure-click company, they may also question its real existence and may not be interested to buy any of its offerings. References 1. Al-Qirim, N. A. 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